Eagle Point Income Company Inc. (EIC) Earnings Call Transcript

Thanks, operator, and good morning. It's a pleasure to welcome everyone to Eagle Point Income Company's conference call covering earnings for 2025. Joining us on today's call are Thomas Majewski, who serves as Chairman and Chief Executive Officer of the company, Dan Ko, Senior Principal and Portfolio Manager for the company's adviser, and Lena Umnova, Chief Accounting Officer for the adviser. Before getting started, I want to remind all of you that the topics we discuss on this call contain forward-looking statements along with projected financial information, and these carry risks and uncertainties that could lead the company's actual results to differ materially from those projections. If you'd like more information about factors that might affect the company, as well as the statements and projections included herein, please see the company's filings with the Securities and Exchange Commission. Any forward-looking statement or projection of financial information we make during this call rests on information available to us as of today's date. We disclaim any obligation to update our forward-looking statements unless the law requires it. Earlier today, we filed our third quarter 2025 financial statements and investor presentation with the Securities and Exchange Commission. You can also find these in the Investor Relations section of the company's website, eaglepointincome.com. A replay of this call will be available later today as well. I'll now hand the call over to Thomas Majewski, Chairman and Chief Executive Officer of Eagle Point Income Company.

Thank you, Darren, and good morning to all of you. We're glad you could be on today's call with us. The third quarter was a positive one for Eagle Point Income Company. Our NAV went up, and we funded our distribution through both net interest income and recurring cash flows. The breadth and expertise of the Eagle Point platform continue to serve as important strengths as we work to take advantage of opportunities in a fast-changing market for CLO investing. In the quarter, the company produced net investment income, after subtracting realized losses, of $0.26 per share. That figure consisted of $0.39 per share of net investment income, reduced by $0.13 of realized capital losses. On the recurring cash flow side, we landed at $17 million, which works out to $0.67 per share — essentially in line with the $18 million, or $0.67 per share, we posted in the prior quarter. That $0.67 per share figure exceeded our regular common and total expenses by $0.05 per share. When we closed out September 30, NAV had risen to $14.21 per share, up from $14.08 per share as of the June. Several things drove that improvement: continued portfolio performance, net investment income covering our common distribution, a more favorable market backdrop, and careful capital management. For the third quarter, our GAAP return on equity was 3%. We deployed $60 million into new investments during the quarter. The new CLO equity we acquired in that period had a weighted average effective yield of 16.6%. Since we have the ability to put money into CLO debt as well as CLO equity in both the primary market and the secondary market, we can assess relative value opportunities no matter where they appear. Thanks to Eagle Point's extensive expertise in the CLO market, our belief is that this approach positions us to deliver appealing returns and long-term shareholder value. During the quarter, we completed three resets and four refinancings involving our CLO equity positions. Those actions lowered the cost of debt within those CLOs and, when it came to the resets, extended the reinvestment periods. That keeps making our portfolio's weighted average remaining reinvestment period and its long-term earnings power stronger. Through our at-the-market program, we issued $35 million of preferred stock in the third quarter. In light of the Fed's recent rate cuts, we shared earlier today that all of our 7.75% Series B term preferred stock is scheduled to be redeemed; through this move, we can keep refining our capital structure while bringing financing costs down. With that in place, the company is set up to increase earnings power for common shareholders down the road; we also repurchased $21 million worth of common stock during the quarter, paying an average 8.3% discount to NAV. That gave us NAV accretion of $0.07 per share. As of today, we announced that the board has lifted our common share repurchase authorization to $60 million, up from the $50 million figure made public back in June. Since June, through October 31, we've repurchased in total $33 million of common stock and an average discount of 8.8% to NAV, creating $0.11 per share of NAV accretion for our shareholders. These moves show our continued dedication to increasing shareholder value while keeping leverage prudent and our balance sheet flexible. Our intention is to stay active repurchasing stock whenever it trades below NAV. Interest rates have been lowered by the Fed on two occasions since our August earnings call. The bulk of what we hold sits in CLO debt, which is tied directly to short-term rates, so those coupons will come in smaller because of those Fed reductions. Today, we announced three monthly payouts of $0.11 per share for the '26. That marks a decrease from the $0.13 per share we had been paying each month, and it mostly mirrors what the Fed's rate cuts have done. When determining the monthly payout amount, the board weighs many things, such as portfolio-generated cash flow, GAAP earnings, and the obligation to hand out nearly all taxable income. In our view, this newly set payout matches both today's rate backdrop and what the company can likely earn soon. Because CLO debt carries a floating rate, our earnings capacity should shift as benchmark rates shift. It goes up when rates climb; even so, we think junior CLO debt still delivers attractive returns for the risk taken relative to corporate credits of similar ratings, thanks to minimal credit costs and an above-market yield. At this point I'll hand things over to Dan Ko, Senior Principal and Portfolio Manager, who will discuss the market. Regular cash flows came in above both our common distribution and all expenses by $0.05 per share. That produced $0.07 per share of NAV accretion. Today, we announced 3 monthly distributions of $0.11 per share covering 2026's first quarter.

Thanks, Tom. I'll give a brief update on what happened in the loan and CLO markets in Q3. The S&P UBS Leveraged Loan Index posted a 1.6% return for the quarter and kept performing strongly in October, with a 0.3% gain for that month. Five leveraged loan defaults occurred in the quarter, and at September 30, the trailing twelve-month default rate was 1.5%, compared with 1.1% at June 30, yet still far under the 2.6% long-term average. The First Brands default that received widespread coverage drove most of that increase in the default rate, though its effect on the broader CLO market was minimal. When you look through, First Brands is only 25 basis points of what we hold, and we wouldn't read that as evidence of wider credit deterioration. Remember that our CLO double B's get the advantage of par subordination, so the hit in September was 41 basis points, a figure that remains far under where the broader market sits; with rates likely to fall even more, defaults should remain subdued, since loan issuers will be dealing with substantially cheaper interest expenses; beyond that, corporate fundamentals across the loan market continue to hold up, as issuers by and large keep expanding revenue and EBITDA despite what inflation, tariffs, and rates have done over the last twelve months. During the quarter, prepayments at par accounted for approximately 6.8% of leveraged loans, which works out to about 27% on an annualized basis. Generally, issuers continue to take proactive steps regarding their near-term maturities, and as we've mentioned on prior calls, the maturity wall keeps being extended further out. Turning to CLO new issuance, the quarter's volume came in at $53 billion. That's a modest uptick compared with $51 billion during Q2. Q3 reset activity totaled $69 billion, while refinancing activity came to $36 billion. Both figures marked a significant increase versus the prior quarter. Despite the many periods of volatility experienced in Q3, CLO debt spreads have remained resilient. Sure, here's a lightly edited version of that excerpt: Lower base rates do put pressure on what our CLO debt portfolio can earn. But even so, we think the yield and the low credit expense on CLO BBs look very appealing next to fixed income instruments with similar ratings. Meanwhile, our CLO equity exposure gives us a partial offset when rates fall, because it isn't as sensitive to rate moves. What really drives returns is spreads, not base rates. In a lot of ways, lower rates can actually be helpful for this asset class — they ease interest costs for loan issuers and help keep credit stable. We're also seeing more LBO activity, which adds new loan supply and pushes loan spreads wider. As of September 30, our cash position stood at $52 million, and we also had unused capacity under our revolver that can be directed toward investments or buying back common stock. This gives us plenty of liquidity to pursue the most attractive relative value opportunities and create long-term value for shareholders. I'll now pass things to Lena Umnova, Chief Accounting Officer at our adviser, who will take you through the financial results.

Thanks, Dan. For Q3, net investment income minus realized losses came to $7 million, which works out to 26¢ a share. Compare that with NII plus realized gains of $0.39 per share in the prior quarter, and NII plus realized gains of 57¢ per share in last year's third quarter. Once unrealized portfolio gains are included, GAAP net income for 2025 came to $11 million, or 43¢ per share. Breaking down the third quarter: investment income contributed $16 million and unrealized gains on investments added $5 million. Those were partly offset by $6 million in financing and operating expenses, $3 million in realized losses, and $1 million of unrealized losses on certain liabilities carried at fair value. On top of that, other comprehensive income was $1 million in Q3. We made three monthly distributions of 13¢ per share during the quarter, and earlier today we declared three monthly distributions of 11¢ per share for Q1 of next year. At September month-end, outstanding preferred equity securities represented 35% of total assets less current liabilities — the upper bound of our long-term target leverage range of 25 to 35%, which is where we anticipate running the company in normal conditions. The asset coverage ratio for preferred stock at quarter-end, figured under investment company rules, stood at 285%. That sits well above the 200% statutory minimum. At September month-end, NAV was $356 million, or $14.21 per share — up from $14.08 per share at June month-end. Over the quarter, we bought back more than 1,500,000 common shares for a total of $21 million, at an average discount to NAV of 8.3% per share, producing NAV accretion of 7¢ per share. We want to note that every repurchased share was retired. Turning to portfolio activity in October, the company collected recurring cash flows of $17 million from its investment portfolio. Some of our investments, I should point out, are still anticipated to make payments later in the quarter. At October month-end, after accounting for pending investments and settlements, we had $55 million in cash and revolver capacity on hand for investments and other uses. Management's unaudited NAV estimate at October month-end fell between $13.94 and $14.04 per share. I'll hand the call back to Tom now, who'll give closing remarks before we open things up to your questions.

Appreciate that, Lena. During Q3, we showed how we stay hands-on with managing our portfolio and carrying out our strategy as market conditions kept changing. We were picky about locating the strongest relative value chances across CLO debt and equity; meanwhile we kept busy with our share buyback effort, purchasing stock back at an aggressive pace, since we view it as underpriced. The board boosted that program, handing us additional room to keep acquiring our own shares cheaply; for the company, that's a terrific investment. Stretches such as this tend to pay off for investors who are patient and well-capitalized, and we think the company sits in a strong spot to keep producing dependable risk-adjusted returns and to build long-term value on behalf of our shareholders; we're grateful for your ongoing backing. Thanks for the time and for your interest in Eagle Point Income Company. Lena, Dan, and I are now ready to take your questions. Operator?

Hi, Eric. How's it going?

Hello. I appreciate it. Good morning. It's nice to speak with you once more today. I'd like to begin by turning to slide 26, and it appears that, as you know, in the latest figures for revenue and EBITDA changes among below-grade businesses, there's been a slight uptick recently. And then if we sort of, well, factor in the Fed's rate cuts and decreases and such that have already occurred and perhaps extend the futures curve out somewhat, it looks like, you know, profits for these companies are headed in a favorable direction. So I'm just wondering what that implies for your outlook regarding, you know, credit quality down the road. There definitely are certain worries in the market right now and a few uncertainties on the macroeconomic front, but I'm curious if you could combine those elements and share some views about credit quality ahead. Yeah. That's an excellent question. And on this particular page, which appears to be page 26 in the deck, you're able to view information stretching back more than 10 years, all the way to 2012; and typically companies below investment grade ought to expand more quickly than the overall economy. That's simply sort of the character of this type of entity. They carry leverage; they focus on growth. Often, they have sponsor backing. When you examine the past several quarters, generally speaking, a favorable revenue pattern is evident. And a somewhat positive EBITDA pattern, though not quite as strong as the revenue one, so there's a bit of a gap there. Yet on the whole, that's precisely what we hope to see. This extends through Q2, which does capture some of the tariff-linked activity. Q3 figures are still sort of in the process of being finalized at present; but on balance, you know, we consider this credit positive in terms of direction. You know, regarding these figures, I don't wish to claim they could never be sufficient — if both the 6.3 and 4.3 were twice as large, we certainly wouldn't complain. If they were three times as large, we might start to question what's happening. But on the whole, the expansion of these businesses is very much returning to the proper trajectory; we did experience a bit of a jolt earlier in the year; yet the main point here, you know, if revenue and earnings are increasing, you know, those represent credit positives. You know, generally speaking for the firms we engage with.

Dan Ko here, if I could jump in on that. For as long as businesses like these keep expanding both revenue and EBITDA, we really haven't observed any meaningful rise in defaults. In fact, should the growth rate perhaps tick higher, defaults are probably going to begin easing off, which is what some of the research we're looking at suggests, along with next year's outlooks, where default rates appear to be declining. We've also noticed that the share of LMEs compared with a year ago has been trending downward; and broadly speaking, lower rates ought to bring down interest costs for many of these companies; so when you look at it from a credit perspective, there should be at least certain tailwinds as we head into next year.

That's really good to hear. Then looking at the following slide, number 27, there's clearly been a pretty big jump in yearly trading volume going back to 2020, aside from 2021, I suppose; and if I take the first 3 quarters and project them through the fourth quarter, it seems like '25 is tracking toward a record. So, I guess this may be a question with 2 parts. First, what's caused that growth over the last, let's say, you know, more than 5 years? And second, how does that affect your business when it comes to running Eagle Point Income Company?

Sure. When it comes to trading volumes, I'd say part of it stems from the simple fact that CLOs are getting more attention. I believe folks have come to appreciate the premium yields available to them, plus the low credit expense on CLO debt compared with, sort of, other fixed income asset classes, the rated fixed income assets that exist. So I think people have looked at the numbers showing how strongly it has done. As a result, we're seeing far more activity in the CLO arena. More newcomers are, sort of, considering purchases of CLO debt and equity, which has, sort of, ramped up how competitive things are; being, sort of, the seasoned participant in this area definitely helps there, you know, since we're a leading counterparty for just about every desk out there, from both our debt and equity perspective; and as for the second portion of what you asked, part of that, I suppose, of the rise is actually because of, I guess, ETFs arriving on the scene, sort of, within the last couple years or so. So I think much of the investment-grade trading activity is likely tied to ETF. Some of the non-investment grade too. But in the end, we believe the extra liquidity we're observing in the market, I think, is a positive; because it lets us, sort of, adopt views on investments to purchase and sell. And the bid-ask for many of these tranches has, sort of, narrowed. So it's simply a simpler method for us to, sort of, convey views regarding our positions.

Thank you. That's my final question. I want to confirm I've got your reasoning right regarding the dividend reduction. As we head into the first quarter of next year — is it fair to assume, and I believe you said this, that it's mainly because of the rate cuts from the Fed we've already witnessed, plus possibly additional ones on the way? Can we reasonably assume you believe the portfolio's earnings power will probably decline somewhat from the figure you reported in the latest quarter?

Yes. Clearly, that plays a role — for the CLO debt portfolio, rates are one thing pushing it that way. However, we're doing certain rotations inside the CLO equity portfolio aimed at boosting earnings and counterbalancing part of that. Plus a few other investments with higher yields. So we adjusted the dividend rate to a level we consider sustainable in the near term. Naturally, a lot of elements feed into setting that every quarter together with the board. Still, for Q1 at least, we believe that's more or less the right level.

Erik Edward Zwick here, thanks for taking my questions.